The right to freely choose the means of settling disputes concerning nationalization
In this regard, there may be two types of potential disputes: disputes between states and disputes between the host country and the foreign investor. Achieving agreement on arrangements for the second-type dispute resolution has always been more problematic. The Latin American countries have taken a particularly strong stance on this matter by making provisions in their constitutions and by applying the Calvo clauses in contracts securing that foreigners should be subject to the law of the host country and that they should bring investment disputes only to local courts. On the other hand, Western states have stressed the right of host countries to grant diplomatic protection and the right of foreign investors to adjudicate in cases where the fairness of local courts is questioned.373
Resolutions of the General Assembly No. 1803 (XVII)374 and 3171 (XXVIII)375 and Article 2 of the Charter of Economic Rights and Duties of States (CERDS) are important in this respect, although, as regards dispute resolution, they only concern the disputes on compensation. Resolution No. 1803 (XVII) indicates the need to exhaust local remedial actions before an applicant appeals to arbitration or international jurisdiction, unless otherwise agreed. Article 2 of the CERDS is consistent with the Calvo clause, and therefore only emphasizes the resolution of disputes by national courts, unless a free choice of other peaceful means has been made.
The requirement of prior exhaustion of local measures is strongly rooted in international law and is expressed in treaty law,376 international jurisprudence,377 and in doctrine. It amounts to the fact that the state against which a complaint has been brought for damages caused by non-state actors has the right to refute such action if that entity has not exhausted all remedies in accordance with the law of that state. This requirement results from the principle of state sovereignty and expresses respect for the territorial jurisdiction of states. Its justification is that the state must be able to remedy the situation in accordance with its own judicial or administrative procedures.378
In accordance with the ICSID Convention, a contracting state may require that all local administrative or judicial means are exhausted before agreeing to international arbitration. The Convention also provides that any contracting state shall provide diplomatic protection or bring an international claim in relation to a dispute which one of its investors and other contracting state agreed to surrender under the ICSID arbitration procedure.379
The Draft OECD Convention on the Protection of Foreign Property (1967)380 underlines the role of international arbitration in inter-state disputes. It also indicates that the parties’ investors may institute proceedings before an arbitration tribunal established under the Convention regarding: exhaustion of local or other (national or international) mandatory remedies; acceptance of the jurisdiction of the arbitration tribunal by the host country; and the waiving by the receiving State of the right to submit a claim directly to the defendant state or to bring it before an international tribunal.381
The Inter-Arab Agreement on the mutual promotion and protection of investments (1980)382 established the Arab Investment Court, which is competent to resolve any dispute between states-parties or between Arab investors and host countries. Article 31 of the Agreement states that the Arab investor first addresses the justice system of the state in which he made the investment. In the event of conflicts of jurisdiction between the Arab Investment Court and national courts, international jurisdiction of the Court shall prevail.383
The dispute settlement regulations included in the Investment Agreement of the Organization of the Islamic Conference (1981, now under the name Organization of Islamic Cooperation) offer the opportunity to present disputes for national or international arbitration, without having to exhaust local remedies.384 The same applies to the international arbitration procedure specified in the ASEAN Investment Agreement.385 NAFTA includes an arbitration procedure for settling disputes between the state and the investor.386 ICSID also defines its own procedures for settling disputes between the state and the investor.387 The Energy Charter Treaty discusses dispute settlement mechanisms, distinguishing between the investor and state disputes and the disputes between states-parties to the agreement. The investor may decide to submit the dispute to the courts or administrative tribunals of a state that is a party to the dispute or in accordance with any applicable, previously agreed dispute resolution procedure, and may decide to submit the dispute for international arbitration or conciliation. Recourse to administrative courts is therefore treated as an option, not as an obligation.388
Despite the controversy and uncertainty indicated, almost all of the above-mentioned acts emphasize the right of states to freely choose dispute resolution measures for nationalization and compensation. This freedom includes the right to demand the exhaustion of local resources in the context of a dispute between the host country and the foreign investor, as well as the freedom to resort to other peaceful means, to which interested parties freely agreed. This position is also reflected in the Seoul Declaration, which states that disputes must be settled by peaceful means chosen by the interested parties and that the principle of local remedies should be respected, if applicable.389 The use of the phrase “interested parties” indicates that it also includes international arrangements between the states and foreign investors.
3.5.2.5 The right to resolve disputes based on national law
Although both Resolution 1803 (XVII)390 and the Charter of Economic Rights and Duties of States (CERDS)391 provide that compensation should be “appropriate”, they differ essentially in the law applicable to its determination. The first relates primarily and the second exclusively to the national law of the nationalizing state. Resolution No. 1803 (XVII) also refers to international law,392 while CERDS only adds, after expressing “its relevant laws and regulations”, the phrase “and all circumstances that the State considers pertinent”.393 It is obvious that such formulation may result in wide discretionary state powers, but according to CERDS, the state of nationalization remains bound by its national law, in accordance with the Calvo doctrine. The situation is different in Resolution No. 3171 (XXVIII)394 and UNCTAD Resolution No. 88 (XII),395 which do not indicate the applicable law. The arbitration rules of the UN Commission on International Trade Law UNCITRAL (1976)396 define in Article 33 that arbitration tribunals must apply the law determined by the parties as relevant to the substance of the dispute.397 In the absence of such an agreement, the court must apply the law determined by the conflict-of-law rules it deems appropriate, and rule in accordance with the terms of the contract, taking into account the commercial usage applicable to the transaction.
Article 42 of the ICSID Convention (1965) indicates that arbitration tribunals should settle disputes in accordance with such law as the parties to the dispute have agreed. In the absence of an agreement on this subject, the court applies the law of the host state (including its conflict rules) and the rules of international law that may apply in a given case. The Inter-Arab agreement on the mutual support and protection of investments also makes provision for the law applicable to dispute resolution and provides that compensation for expropriation is to be paid in accordance with the generally applicable legal regulations governing expropriation.398 The Energy Charter Treaty, on the other hand, provides that arbitration tribunals resolve disputes in accordance with this Treaty and the relevant rules and principles of international law.399
The issue of law selection has been included in a number of arbitral awards. Most of them recognize the freedom of the parties to choose the law to which the contracts and procedures applicable to arbitration are subject. An example of this can be the three Libyan oil concessions which included clauses of the applicable law.400
Non-binding instruments other than UN resolutions contain only general indications on the subject matter. The ICC guidelines require respect for international law
